Position Paper RAB comments to the Green paper on disaster insurance Our reference: RAB-13-016 Date: 15 July 2013 Referring to: Related documents: Contact person: François Vilnet E-mail: francois.vilnet@partnerre.com Pages: 7 RAB answer to EC green paper on the insurance of natural and man- made disasters Introduction The Insurance Europe Reinsurance Advisory Board (RAB) membership accounts for about 60% of worldwide reinsurance business and is represented at the CEO level by the following major European reinsurers: Gen Re, Hannover Re, Lloyd s, Munich Re, Partner Re, SCOR and Swiss Re. The RAB welcomes the opportunity for reinsurers to comment on the European Commission s green paper on catastrophes. We applaud the Commission s efforts in recognising the needs of the (re)insurance industry and in working toward making Europe a more insurable society against large disasters. We will answer very briefly, from a reinsurance point of view, as we see this contribution merely as a complement to Insurance Europe s answer. The (re-)insurance industry strongly maintains that there is no one size fits all solution in Europe due to the different risk exposures of the various markets, the very wide diversity of covers available, the heterogeneity of data availability as well as the different economic and political conditions across Europe. However, the Commission s Green Paper right concludes that in order to increase risk insurability there is a need for better data, as well as best practices concerning prevention and preparedness throughout Europe. We see this consultation as part of an on-going and cooperative dialogue between the insurance industry and the EU in order to facilitate a flexible environment for sustainable and effective insurance solutions. Through this cooperation, the EU can promote the development of insurance across the different perils, including more use of reinsurance. We view the current process mainly as: Getting a better overview of the situation of the different Member States, Putting pressure on Member States governments to exercise more leadership in this field by highlighting to their constituents the benefits of (re-)insurance as well as the risk-mitigating impact of prevention measures, Increasing risk awareness and developing insurance and risk transfer, Increasing risk awareness and preparedness for adapting to future climate impacts and encouraging optimal insurance solutions, depending on the exposure and situation of various markets, Insurance Europe aisbl rue Montoyer 51, B-1000 Brussels Tel: +32 2 547 5811 Fax: +32 2 547 5819 www.insuranceeurope.eu Reproduction in whole or in part of the content of this document and the communication thereof are made with the consent of Insurance Europe, must be clearly attributed to Insurance Europe and must include the date of the Insurance Europe document.
Addressing the gap between economic losses (assessed at 450 billion euros in Europe for the last 30 years and on the rise) and insured losses. Catastrophes have been on the rise in recent years both in frequency and severity (as stated by major reinsurers studies) and reinsurance plays a major role in paying for these losses. A new feature is that the events are becoming more complex, difficult to model, with potential chain of events (mix of natural and manmade catastrophes as in Japan in 2011) and with global implications (consequences on loss of production in various countries). Furthermore, the economic losses are increasing due to the wealth effect, the industrial production concentration and climate change with sometimes a magnitude of up to 10% of GNP for some countries, thus major consequences for public finances with the bigger gap between economic and insured losses. Europe as a whole is very vulnerable to nearly all kinds of natural catastrophes and man-made disasters that could cause huge economic losses and life losses. Catastrophe (Non-Life and Life) being one of the core reinsurance businesses, this process gives reinsurers a major challenge and a unique opportunity to present messages on reinsurance, to play an active role both from an industry perspective and to show that reinsurance is available and that reinsurers are ready to offer tailor-made solutions and improved insurance efficiency in the various markets. Considering the diversity of markets and risk exposures (Nat cat and manmade across all classes of business), there is no one single solution that would effectively cover the entirety of Europe. However, potential actions at EU level in the form of increasing risk awareness and risk prevention would lead to a huge improvement and further insurance development potential in Europe. We see this effort as one holistic approach to catastrophes in Europe, but there are some basic issues to foster risk awareness, prevention and improved solutions, with the use of reinsurance as a key tool to mitigate losses: In cases where perils may be underinsured or not Solvency 2 consistent, reinsurance must play its role for helping markets and insurers to comply, Catastrophes have the potential to be extreme and with cross-border implications. Thus, national solutions are not always adequate or sufficient, and a global approach to extreme events with a key role for reinsurance is needed, Contributing to insurability issues at market level as States often request reinsurance before getting involved in specific perils (like terrorism). We think the way forward to address and improve the current situation would be a close cooperation between the EC and the insurance/reinsurance industry to: Help the member states to develop strong Disaster Risk Management Contribute to the European framework on adaptation and other forms of risk prevention Develop insurance as an incentive for prevention and mitigation whenever there is a potential gap between economic and insured losses Assessing emerging risks and new potential exposures with a global approach (Non-Life, Life and Health) Foster national solutions where there is a specific need for them Assess the need for a principles-based approach that would suggest best practices for improving the insurability of risk Limit intervention of States and public-backed reinsurers to fill market gaps. 2
Questionnaire (1) Penetration rate of disaster insurance in EU The penetration rate is usually more the effect of a lack of demand from insureds than lack of supply from insurers, thus developing sensitivity among consumers should be a major target. As penetration rates are difficult to measure, the focus should be placed on how to encourage insurance take-up overall rather than comparing these rates to determine the most effective insurance scheme. One indirect way to measure penetration rates at the macro level, however, is to build a historical database in Europe with all economic/insured losses by peril and by country. (2) Further action, mandatory product bundling Combining products is usual for natural catastrophes, sometimes also with political risks (riots, terrorism ). The opt-out option is unusual but could be a feature for business insurance where buyers are more risk aware. The product bundling around catastrophes is usually a market or State decision and cannot be an EU mandatory requirement. (3) Compulsory disaster insurance Compulsory cover for catastrophes is not in use in Europe and cannot be a way forward in a free market. In case of market failure the introduction of compulsory elements may be considered at national level under the following prerequisites: Risk adequate insurance rates. Ample participation of the private sector in setting terms and conditions of the insurance cover. (4) State disaster programmes There are a lot of Public Private Partnerships in Europe. Reinsurance is usually used in State disaster programmes to increase the State intervention threshold. As mentioned in our introduction, the State should intervene only where there is an insurability issue. Any State intervention on any peril should be limited to filling market gaps (for example for Nuclear, Biological, Chemical and Radiological (NBCR) terrorism covers). The ex-post State intervention is a source of moral hazard and insufficient risk awareness. Publicbacked reinsurers benefiting from a State guarantee should not, as is the case in some Member States, enjoy a near-monopoly for the reinsurance of all natural catastrophes, thus exerting unfair competition vis-à-vis private reinsurers. It is possible for many natural or man-made perils to set up successful public-private partnerships where insurers, private reinsurers and the State (or the publicbacked reinsurer) all participate and play their respective roles, while offering extensive coverage to all insureds at reasonable prices. 3
Thus the RAB supports the statement by the European Commission in its green paper that Governments may serve as (re-)insurers of last resort by taking on risks above a certain disaster damage level, i.e., stop-loss re-insurance. This approach blends the potential risk spreading capacity of the government and the ability of the market to apply insurance principles and also to use its administrative capacity, i.e., collecting premiums, marketing and handling claims. Public programmes, therefore, may provide for cover at the highest risk levels, while the private market retains some or all of the lower tiers of risk. We encourage the European Commission to promote this approach actively and take all necessary action. (5) Barriers to parametric insurance There is a general lack of consistent data in Europe, which is not helping to develop these products; furthermore there could be gaps in the coverage. Parametric covers are best suited for risks that are uninsurable or difficult to assess for example business interruption, infrastructure or crops. Therefore, parametric covers have significant potential. The most interesting customer segments are large corporations that are subject to complex business interruption and contingent business interruption exposures, as well as governments who usually suffer considerable damage to uninsured infrastructure. Parametric solutions in reinsurance are feasible for the "big bang", i.e. really catastrophic events. Implementation of parametric solutions which respond to small to medium sized events may be difficult, especially for the high resolution flood risk. The trigger itself can be difficult to define, i.e. using water depth at gauging stations is useful for river flooding, however the trigger is not suited for surface water flooding. In this case the consequent basis risk makes the product undesirable. (6) Risk based pricing Risk-based pricing is key for all catastrophe perils as it is very important for risk sensitivity and prevention, when linked to other measures (limitations, deductibles, conditions ), both for homeowners and business risks, and should be encouraged widely. It is a pre-requisite for insurability and development of insurance/reinsurance covers. (7) Specific disasters with flat rate premiums Flat rates should remain an exception and limited to perils where there is a potential for extreme events, a need for broad mutualisation and a difficulty for individual risk assessment (such as epidemics, political risks, solar events ). (8) Other solutions for low-income consumers The solution for low-income consumers is efficient and fair catastrophe insurance (possibly a basic contract with limitations) at the lowest cost and should not include subsidies. (9) Promoting long-term disaster contracts Long-term disaster contracts may appear to give more visibility and safety to consumers but are not common in Europe. In addition, they also have contractual and regulatory impediments (diminished consumer choice, prohibited by national law). Long-term contracts may operate differently at the reinsurance level than for insurance, as there is a market for multi-year catastrophe covers for the backing of insurers. 4
(10) Harmonisation of contractual information Due to the legislative and cultural differences at EU level, it would be better to enhance the quality and comparability of contractual information through best practices rather than harmonisation. In fact, contractual information is treated in specific national laws. The existing laws on insurance contracts should be used for natural catastrophe insurance. It is more important that all insurance covers in a country are treated consistently, rather than having harmonization across Europe. (11) Alternative terms and conditions As stated in question 6, alternative terms, conditions, limitations, when coupled with risk-based pricing are important tools for insurability and risk prevention, especially in risk-prone areas. (12) Data impact of past disasters The improvement, collection and sharing of data in the various markets must be encouraged and developed. Access to public data is important for all stakeholders, in particular the reinsurers which pay for most of the disasters. (13) Mapping of future disasters Mapping is important both for natural and man-made catastrophes at the lowest granular level. (14) Better sharing of data and tools There could be an increased cooperation between public and private sectors through specialized bodies that could be in a position to deliver data for all the stakeholders and facilitate their mapping and modelling. (15) Development of disaster financing solutions There are a lot of market insurance schemes in Europe, linked to insurability issues or catastrophes (see the EC study on pools and coinsurance schemes). One way forward is to compare the insurability needs of the various financing schemes, while limiting State intervention. Innovation, competition and best practices should foster enhanced and new solutions. In cases where there is a gap in the market, the EU could consider the need for a solidarity scheme for major events over a certain threshold, by market, measured in relation to the country size (for example 2.5% of GNP). There is a legal basis for such a solidarity scheme, as foreseen in the Lisbon treaties for risks like terrorism, and this should be extended to all perils resulting in catastrophes. The best way is to provide an ex-ante specific financing framework and not an ex-post undefined and uncertain financing scheme. (16) Design of insurance for Environment Liability Environment risks are difficult and capacity is scarce, thus more clarity in the directive may be explored by continually increasing awareness about the ELD at both EU and national levels. Mandatory financial security should not be introduced at EU level, as it is an issue in terms of cost and capacity (in particular reinsurance). This security should be limited, optional and tailored according to the needs of the different markets. 5
(17) Data and tools for industrial risks The industrial and technological potential for catastrophes is huge and difficult to measure, in particular for the Seveso type plants and the nuclear industry. The current tools for mapping and modelling the risks, however, can be greatly improved with more readily accessible data. The legislation and market practices are very different throughout the EU. This is a typical area where improvement is necessary as exposure control is difficult to model and insurers covers are often insufficient for extreme events. (18) Specificities of offshore oil and gas The 2010 Deep-water Horizon pollution incident in the Gulf of Mexico stirred interest in new types of cover in this field. In general, insurers and the captive insurance market, backed by the international reinsurance industry, provide sufficient cover to meet the needs of offshore operators in EU waters. The question of whether this is adequate to meet possible extreme losses requires detailed technical analysis. The offshore oil and gas industry is global, and many important participants are not EU firms. This makes it difficult for the EU to take unilateral action in this area. (19) Conditions of third party liability insurance The actual business liability covers are usually insufficient and not tailored to the risks taken. The systematic disclosure of the liability covers to all parties involved could be efficient as a protection and a tool for developing minimal covers in the various activities, but due to the variety of contracts used across Europe any such decisions about disclosure practices should be left up to national level. Environmental liability is covered through non-standardized insurance terms and conditions for heterogeneous risk and related losses from industry accidents where each risk has to be assessed on its own merits and where the terms and conditions of an insurance contact may differ significantly between industry risks in respect of the scope of the insurance contract and in respect of the sum insured. Therefore a general broad disclosure of such an insurance contract would not be appropriate and could also be quite misleading as other third parties outside the contractual parties would lack of the rationale and knowledge which led to the setup of tailored made risk appropriate terms and conditions in an insurance contract. (20) Specific aspects of loss adjusting Loss adjusting is an important element, in particular for extreme events, where availability and competence are important. Cooperation between national markets and a promotion of best lossadjusting practices could help in cross-border or extreme events, even if there are already international expert groups. (21) Important issues omitted or underrepresented As reinsurers are mostly concerned by major catastrophes/events, here are a few general remarks, based on that aspect: There is no qualitative or quantitative definition of catastrophe/event, which may have different meanings and sizes. There should be a clear distinction of types of events (frequency and severity), which have very different consequences for insureds and markets. Extreme events like a major nuclear accident, NBCR terrorism events or solar events should be segregated. 6
There is an underlying assumption that natural catastrophes are in the Property class and that most man-made catastrophes are in the Liability class. In fact, in major catastrophes, and in particular extreme events, all lines could be affected, including Life and Health, needing a global and holistic principles-based approach for all lines, all companies, all markets. There is little about political risks and cyber risks, which could be a major issue in Europe, in particular NBCR terrorism, where there is a specific need for a pan-european study. There is a lack of specific analysis on Life and Health, where major catastrophes are possible, like epidemics. 7